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expectations. The idea was to keep nominal rates low and inflation expectations high. The object was to create negative real rates—the difference between nominal rates minus the expected rate of inflation. For example, if inflation expectations are 4 percent and nominal interest rates are 2 percent, then real interest rates are negative 2 percent. When real rates are negative, borrowing becomes attractive and both spending and investment grow. According to the monetarists’ formula, this potent combination of more borrowing, which expands the money supply, and more spending, which increases velocity, would grow the economy. This policy of negative real rates and fear of inflation was the Fed’s last, best hope to generate a self-sustaining recovery.

Negative interest rates create a situation in which dollars can be borrowed and paid back in cheaper dollars due to inflation. It is like renting a car with a full tank of gas and returning the car with the tank half empty at no charge to the user. Consumers and businesses find this difficult to pass up.

The Fed’s plan was to encourage borrowing through negative interest rates and encourage spending through fear of inflation. The resulting combination of leverage and inflation expectations might increase money supply and velocity and therefore increase GDP. This could work—but what would it take to increase expectations?

Extensive theoretical work on this had been done by Ben Bernanke and Paul Krugman in the late 1990s as a result of studying a similar episode in Japan during its “lost decade.” A definitive summary of this research was written by economist Lars Svensson in 2003. Svensson was a colleague of Bernanke’s and Krugman’s at Princeton and later became a central banker himself in Sweden. Svensson’s paper is the Rosetta stone of the currency wars because it reveals the linkage between currency depreciation and negative real interest rates as a way to stimulate an economy at the expense of other countries.

Svensson discusses the benefits of currency war:

Even if the ... interest rate is zero, a depreciation of the currency provides a powerful way to stimulate the economy.... A currency depreciation will stimulate an economy directly by giving a boost to export . . . sectors. More importantly . . . a currency depreciation and a peg of the currency rate at a depreciated rate serves as a conspicuous commitment to a higher price level in the future.

Svensson also describes the difficulties of manipulating the public in the course of pursuing these policies:

If the central bank could manipulate private-sector beliefs, it would make the private sector believe in future inflation, the real interest rate would fall, and the economy would soon emerge from recession.... The problem is that private-sector beliefs are not easy to affect.

Here was Bernanke’s entire playbook—keep interest rates at zero, devalue the dollar by quantitative easing and manipulate opinion to create fear of inflation. Bernanke’s policies of zero interest rates and quantitative easing provided the fuel for inflation. Ironically, Bernanke’s fiercest critics were helping his plan by incessantly sounding the inflation alarm; they were stoking inflation fears with language no Fed chairman could ever use himself.

This was central banking with the mask off. It was not the cool, rational, scientific pursuit of disinterested economists sitting in the Fed’s marble temple in Washington. Instead it was an exercise in deception and hoping for the best. When prices of oil, silver, gold and other commodities began to rise steeply in 2011, Bernanke was publicly unperturbed and made it clear that actual interest rates would remain low. In fact, increasing inflation anxiety reported from around the world combined with continued low rates was exactly what the theories of Bernanke, Krugman and Svensson advocated. America had become a nation of guinea pigs in a grand monetary experiment, cooked up in the petri dish of the Princeton economics department.

The Bernanke-Krugman-Svensson theory makes it clear that the